Blue Shield wins ruling over rescinded health insurance

Plaintiffs Steve and Cindy Hailey stipulate that they lied in their application for coverage and that the application was clear.

A judge ruled Thursday in mid-trial that Blue Shield of California had acted properly in canceling the health insurance policy of a former Cypress resident after he was seriously injured in a car accident.

It's the first verdict stemming from the spate of rescissions that have enraged consumer activists and led to regulatory enforcement by the state.

The judge made the ruling in response to a motion by Blue Shield that included an agreement it had reached with plaintiffs Steve Hailey and his wife, Cindy. The Haileys stipulated they had lied about his preexisting conditions to obtain coverage.

Blue Shield declared the resolution a "complete vindication."

"It means we acted properly every step of the way," Blue Shield's top lawyer, Seth Jacobs, said in a statement. "It means that our underwriting procedures were fair and complete, our application was clear, and we acted in good faith. This decision proves that Blue Shield of California had every right to rescind the Haileys' coverage."

Michael Nutter, the lawyer for the Haileys, declined to comment.

The ruling by Orange County Superior Court Judge Peter Polos was a rarely granted decree known as a directed verdict, which is typically sought by a defendant after the plaintiffs present all their evidence. A directed verdict is a judge's decision that, as a matter of law, the plaintiffs' evidence is so inadequate that no reasonable jury could rule in their favor.

"This is a very strange settlement in many respects," said Jeffrey Isaacs, chief assistant Los Angeles city attorney, who is pursuing a separate lawsuit against Blue Shield over rescissions.

Just a day earlier, Isaacs noted, an expert witness for the Haileys testified "that the Blue Shield application form was highly ambiguous and confusing and that Blue Shield had not done sufficient underwriting."

Isaacs said the ruling would have no bearing on the city attorney's case against Blue Shield.

The verdict came before Cindy Hailey had a chance to take the stand. The judge's order offers no clues about why the couple suddenly capitulated.

The jury began hearing evidence last week. Blue Shield sought the court ruling after the Haileys stipulated that they "willfully misrepresented and willfully omitted material information" on their application for coverage.

The Haileys also stipulated that the application was "clear and unambiguous" and that Blue Shield's "rescission investigation procedures were reasonable."

In all, the couple made 11 stipulations that represent an abrupt reversal in the position that they had maintained since Blue Shield rescinded their coverage after a 2001 car accident that led to many medical bills.

The Haileys had sued Blue Shield, alleging that the company waited until after Steve incurred medical bills to investigate the accuracy of the application.

They also alleged that if Blue Shield had pulled medical records and canceled the couple's policy sooner, the Haileys could have obtained insurance through Cindy Hailey's employer without having to pass any upfront underwriting.

Blue Shield's lawyer, Jacobs, also complained about "unrelenting negative coverage in the Los Angeles Times." Despite that, he said, "we fought this lawsuit because we knew we had behaved properly and we were confident that the evidence would speak for itself. It has."

When Blue Shield rescinded the Haileys' coverage in 2001, the practice was largely hidden. Since then, a series of stories in The Times disclosed that insurers routinely rescinded individual policyholders' coverage after expensive medical care.

Those stories led regulators to investigate and obtain fines and settlements with all five of the state's largest companies, including Blue Shield.

In an earlier deposition, Cindy Hailey said she filled out the application by herself, found it confusing and believed that it was asking for her own medical history only.

She also said the couple had no reason to lie because they had the option of obtaining coverage through her employer.

The couple decided to seek medically underwritten individual coverage from Blue Shield to retain access to a physician not available through her employer's plan, she said.

So, she said, she did not disclose that her husband had preexisting conditions, including hypertension.

The couple faced a countersuit from Blue Shield seeking to collect $104,000 it paid for Steve's hospital care before canceling coverage.

The judge's directed verdict found for Blue Shield in its countersuit, too, declaring the rescission valid. The judge's order did not address the claim in the countersuit seeking the restitution.

The Hailey case was only the second rescission suit to go to trial. The first case, against Health Net Inc., went to arbitration, where a judge awarded $9 million to a Gardena hair salon owner and found that Health Net rescinded her coverage in bad faith after she was diagnosed with breast cancer.